Zacks_Analysts' Blog : Friday Set Up for Slight Pullback - Analyst Blog

Stocks have made some impressive gains this month as some of the more exaggerated concerns about the macro backdrop have eased. These concerns pertained to the U.S. economy, Europe, and the corporate earnings picture. I will weigh in on this morning's Personal Income & Outlays report for September a little later. But let me briefly touch on these three concerns first.



We know now that the U.S. economy has decent enough momentum to keep it from a fresh recessionary downturn. Also, the ongoing earnings reports show that the corporate earnings picture may not be as strong as in the last few quarters, but it is definitely not deteriorating either. And most importantly, the Euro-zone deal, despite its very apparent problems, goes some way towards restoring investor confidence by significantly bringing down the contagion risk.



While it would be too optimistic a view to expect the Euro-zone deal to fix all of Europe's problems, it nevertheless is the first credible plan to take another Lehman-like event off the table. It does that by bringing down Greece's debt load, recapitalizing the banks and ring-fencing the other vulnerable countries by giving the rescue fund more firing power. Only time will tell how successful this plan will be, but it has no doubt received the vote of confidence from the global markets.



In this morning's economic readings, we got a modestly negative read from the September Personal Income and Outlays report. Growth in Personal Income came in weaker than expected, while Outlays (or consumer spending) came in better than expected. Consumer spending, which accounts for more than two thirds of the economy, increased at 0.6% in September after the 0.2% gain in August. The significance of this morning's report for the market is relatively limited since its details were already incorporated in Thursday's first read on third quarter GDP report. The GDP report showed a 2.5% growth rate for the economy and a 2.4% increase in consumer spending.





On the earnings front, Merck (MRK) handily beat EPS and revenue estimates. Chevron (CVX) also came ahead of expectations. Newell-Rubbermaid (NWL) beat on EPS, with in-line revenue, while Whirlpool (WHR) missed expectations and guided lower, citing weak demand. In other corporate news, Hewlett-Packard (HPQ) announced that it will be keeping its PC division after all.

Given Thursday's monster rally and the impressive gains of the last few weeks, it would not be unusual for stocks to take a pause today. In fact, it will be positive for the market to consolidate its gains before making another major move. I am reasonably confident, however, that the market's next significant move will be to the upside.
Read the full analyst report on "MRK"
Read the full analyst report on "CVX"
Read the full analyst report on "NWL"
Read the full analyst report on "WHR"
Read the full analyst report on "HPQ"
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